Do you want to start a Shipping Line ?


Everyone who is regularly shipping cargo with the container carriers knows how tough it has been in the last couple of years to get a reliable product – physical or customer service. Naturally those who have contracts fare a little better but they are still subject to volatile schedules, extended transit times, space limitations, inflated rates and even difficulty getting clarity from carriers support staff and systems ( see my January 22 blog ). The fact that some of these issues are clearly outside the control of regular liner carriers only re-enforces a sense of unreliability.

It is unsurprising in these circumstances that large shippers and their forwarder suppliers consider their options and of course the ultimate expression of regaining control ( or trying to ! ) is to create in house infrastructure to move your cargo.
In recent weeks the retailer Lidl was reported to have started their own Shipping Line and to have bought one vessel. Other big retailers have mainly using third party vessel operators to assist with chartering or have simply bought roundtrip space and have not taken the significant step of purchasing vessels.
Irrespective of which route shippers or forwarders have used to get capacity , they effectively become mini Shipping Lines as soon as they commit to taking ships or space over a fixed period of time – even if the crewing and routine maintenance are sub contracted or included in their price.
What will be their opportunities , challenges and risks then of becoming a mini Shipping Line :

    If you are buying or chartering a ship/space and buying/leasing containers at the moment you are doing so at historically high levels .
    All the shippers who have taken this step will obviously have calculated what their costs are today with the regular liner operators and, over and above that, put a notional opportunity cost against the lost sales and client dissatisfaction they have incurred. Against this they will have done their best to quantify the full set of costs from running their own shipping operation.
    The problem they will have is that this comparison will be highly fluid as no one really knows how long the current inflated rates will continue and indeed whether liner operators service levels could radically improve if some of the current congestion is eased.
    Meantime ship/equipment commitments are not fluid and if it’s decided 6 months into a 3 year charter or slot deal that the operation is no longer advantageous and the equipment is redundant then there is going to be very considerable exit costs. Of course one can opt for shorter term deals with charterers and leasing companies but then the daily charter costs are even higher.
    This is intrinsically linked to (1). How many ships you need, port costs, bunker costs and ultimately equipment costs will be determined by which ports are called at and what frequency of service is required.The most cost effective ship system model is to only load cargo between two ports – one at each end of the trade – and look for ports that can turn around the ships quickly. High throughput ports that global liner operators use are often already congested but are also under heavy pressure from their regular clients to put newcomers at the back of the berthing priority queue !!! The ideal target then is an aspiring second level port that can provide prompt berthing, good productivity and strong hinterland serving capability.
    Most shippers, however, are not serving one country or even one continent so any deployment can only serve the most strategically important market and will have to compromise on frequency ( ie tend to bi-weekly or monthly ) if they want their initial commitment to be manageable. This obviously means that whatever is done has to be in tandem with maintaining a strong liner operator base.
    Shippers will have made a careful assessment of their base needs and what volume they can regularly commit to their own service.
    In very general terms the bigger the ship the better the slot economics but that’s not always a smooth progression depending on supply/demand in particular segments of the market.
    As liner operators know only too well ( indeed it was historically their downfall ) the best slot economics work with full ships ( or full space if you are buying slots ) and you are dependent on one supply of cargo – your own – you may be a lot more vulnerable to utilization variations .
    Of course newcomers can learn from their big liner suppliers and cooperate with other shippers to spread their bets and tap into bigger capacity and more ships to increase frequency/coverage. Just at the time you are attempting to take back some control of your destiny, however, this means compromises and inevitably a slower decision making process.
    Managing a fleet of containers is a dark art in itself and liner operators have large teams pouring over fleet sizes and what percentage should be bought and leased as well as the more mundane tracking of where boxes are, what their condition is and their empty positioning needs.
    The size of fleet required will result from an equation that involves the number of ships operating and average turnaround times. Congestion and clients holding onto containers for longer average periods has had significant negative impacts in recent years on the size of fleet required.
    One of the largest inherent problems with containerization is imbalance. Trades that have an equal flow of full equipment in both directions are about as rare as a totally honest politician. Typically one direction is dominant and there is a need for significant empty ocean positioning – and if containers start going deep into the hinterland ( particularly by rail ) there will also be land positioning required.
    Containers get damaged and have to be repaired whether owned or leased. This requires careful management to avoid repairs defaulting to the maximum rather than the minimum required due to repair facility entrepreneurism !!!
    There are then significant costs in running a container fleet over and above the purchase/lease costs. As with ships, if the geographic scope is kept under strict control it is possible to run a leaner operation.
    Running a mini Shipping Line is going to require dedicated people to cover the daily management of ships and equipment as well as terminal, depot and inland suppliers. Many of these tasks can be learnt relatively quickly but the regular operators have staff who often have spent their entire career in shipping and have sophisticated IT systems to support vessel operations, equipment management and documentation. The shipper’s salvation will be limited geographical scope, a small number of suppliers and no need for a sales organization but nonetheless an investment is required in getting the right people and IT.

The above is clearly not exhaustive but gives a very high level view of some of the big ticket items. Regular liner operators have the very significant advantage that they are experts at what they do. They have significant scale advantage in procurement and crucially have accumulated owned and chartered/leased assets at times when costs were low as well as high so there is some averaging of cost. They have the ability to move assets between multiple trades and are thus not wholly vulnerable to the vagaries of one trade or one sub market within a trade. Most importantly they are not dependent on the business of one client. The above are pretty substantive advantages but of course if the regular operators rates are high enough and their service bad enough the relative equation can swing towards shippers taking the plunge. This is not a decision for the faint hearted though and has some significant risks which are only partially controllable. The joke in shipping before the very recent past was ‘ How do you make a small fortune ? : Start with a big fortune and invest it in container shipping ‘. In the last few years some companies have made big fortunes from small ones but the shipping market will not defy gravity if the demand/supply equation moves towards excess supply.

Its also very important to note in wrapping up that there are some intermediate options that should be considered before taking the radical step of setting up a Shipping Line. A review of your existing carrier base and what can be achieved with them is an obvious starting place. Apart from other major liner operators there are a number of smaller operators emerging – some of whom have a solid base and are expanding quickly.

Probably the most significant intermediate step a shipper can take would be to buy or lease their own equipment. The reason for doing this would not be related to savings in freight or better access to space because carriers are giving minimal rate/access advantage to SOCs ( shipper’s own containers ) even when they are running short of their own equipment. The attraction would be the ability to tap semi liner multi purpose and breakbulk carriers that can offer space but do not offer containers. Shippers will still have all the issues raised above regarding managing containers but this is a less risky way of tapping some incremental capacity and making sure that putting your hands on containers is one of your lesser problems. Wherever you go in the range of investment and risk there is a lot of assessment to be done before you leap !!!